A trade dispute between the USA and Canada Suhail Abboushi (2010) (excerpts_

1.One largest Canadian exports to the USA. 2005: Canada’s provinces shipped 21.5 billion board feet of lumber (value US$ 7.4 billion). 1840s. 1890s, 1930s, 1980, 2006: Dispute - debate started in the USA & continued over imported Canadian wood. 2. Resolutions of limited durations had been introduced: Trade barriers continued to be imposed: US countervailing duty (CVD) and anti-dumping duty (ADD)/tariffs Amounted to about $ 100 million a month

US lumber producers argue: Stumpage fee is non-market based, decided by provincial governments, and is below market prices. Even a small per unit cost differential advantage for Canadian producers results in substantial cost advantage over US producers. Timberland in the USA, is auctioned in a market-based system of bidding. In Canada, auctioning is limited. Canada does not allow non-Canadian companies to acquire Canadian logs harvested in Canadian public timberlands Result: Does not allow non-Canadian companies to export Canadian logs. Canadian share of the US market for softwood has been rising and currently accounts for 34 percent.

Arguments by Canada The stumpage fee is not a “price.” It is a “tax” imposed by the government on the “tenure holder” in return for the right to harvest government-owned natural resource, timberland. Stumpage fees in Canada are adjusted regularly to reflect changes in the market conditions The fees do not provide competitive advantage to Canadian producers The stumpage system meets the test of “adequate remuneration” set out in US countervailing laws.

Canadian provinces place restrictive regulations on the lumber companies with regard to the use of timberland and the sharing of infrastructure costs. Canada ships 70 percent of its lumber production to the USA.

Disruption of the US market can be catastrophic for Canada’s softwood industry. The Canadians are alarmed because suppliers from Scandinavia, New Zealand, and Chile have been supplying the US market and grabbing a growing share of the market. US imports of non-Canadian softwood have quadrupled in the last decade. To remedy the decline in its market share in the USA, Canadian companies embarked on cost-cutting strategies. introduced laser technology in their mills which increases lumber production of logs by 15 percent. Production cycles of 24 hrs to cut their cost per unit. Such measures have partially softened the impact of tariffs on market prices (see, Aldrich, 2005).

US timberland owners Timberland owners in the USA are benefiting from this trade dispute: e.g. Plum Creek Timber company which owns 8 million acres of timber land in two dozen states. The company is in timber business and also in real estate development of logged off lands.

Canadian companies pay: income tax stumpage fees do not own the lands they log. Unlike Plum Creek and other US companies, Canadian companies cannot harvest timber land and then build housing projects or other real estate development Such projects added $ 75 million to Plum Creek’s bottom line in 2004 (see, Cushman, 2006).

The US timber industry is increasingly relying on Mexican labor for thinning and replanting jobs. Many of the jobs “protected” by trade restrictions are now jobs filled by imported labor It is estimated that for every lumber or sawmill job protected in the USA, there are American workers in industries that depend on Canadian lumber. Curtailing the supplies of Canadian lumber or raising their prices hurts the thousands of US workers dependent on these imports.

Again and again, and in March 2006, NAFTA arbitration panels ruled for Canada, against the USA, a total of 11 times: Declared the tariffs illegal Demanded the return of collected duties to Canadian companies who paid them (Canada Appeals, 2006).

Latest agreement In April 2006, Prime Minister, Stephen Harper negotiated with President George Bush an agreement to suspend this dispute for seven years Both sides agreed to return to the previous regime of “managed trade.” The USA will drop the tariffs, both CVDs and ADDs Return 4 billion of the US$ 5 billion already collected in tariffs US will keep $ 1 billion : half of that will be given to members of the Coalition of Fair Lumber Imports who initiated litigations against Canada. Canada agreed to cap its share of the US market at 34 % Canada to impose an export tax and limit its shipments of lumber if prices in the USA were to fall below their current levels. See: Table III summary of export taxes in relation to domestic price in the USA.

Critique: Canada’s constitution and timberland ownership Canada’s constitution confirms that: forestland ownership belongs to the provinces each province has its independent method of managing its timberland. all provinces have long-term land tenure arrangements giving logging rights to logging firms. companies pay stumpage fees for cutting the trees, hauling them away, and planting replacements to sustain forestry in the forest lands. The US timber lobby does not recognize Canada’s constitutional authority - brushes aside the Constitution issue and proposed a remedy: sell Canada’s forest lands to private businesses or halt imports of Canadian lumber!

In sum: Canada’s public ownership of timberland is not a trade issue. Canada’s Constitution assigns exclusive authority to provincial governments over natural resources like timberland.

Stumpage fee is not lower than “market price” British Colombia designated 20 percent of its forest land to be managed in an open-auction free market system. The province decided to use the prices set through this “free-market” mechanism to determine the stumpage fee rates for the rest of the province’s forests, so that the stumpage fees would not be lower than the “market” price. To this date, this “free-market” arrangement has not resulted in any price or stumpage fee reductions. The stumpage fee charged by the province under the traditional system was not artificially lower than the “market” based price.

Complexity of fee calculations: The precise stumpage fee calculations are complex and vary across provinces. Canadian timber companies are under numerous restrictions that further complicate the calculation of stumpage fees, e.g., 1. Canadian companies are not allowed to log “at will” – they are restricted by “Annual Allowable Cut.” 2.Exporting raw logs is prohibited. Timber companies are required to own and operate local saw mills. 3.Canadian companies are required to build and maintain roads and highways to timberlands. 4.These companies are required to replant all logged out lands. 5.They may not use logged out lands for any commercial development – the government continues to own those lands. Observers and analysts of this dispute situation agree that the impact of this web of regulations and restrictions on a uniform pricing, or stumpage fee, in Canada’s provinces is difficult to ascertain.

Profitability The Global Lumber/Sawnwood Cost Benchmarking Report (December of 2005 by International Wood Markets Research and other organizations) US West Coast sawmills with advanced technologies are the most profitable in the world – about three times the average rate of profitability world-wide. British Columbia’s mills, which are equally advanced in technology and capacity as the West Coast mills, were the third most profitable, lagging behind the US mills, despite the lower priced timber they have access to.

All sides to the dispute hope: April 2006 agreement could bring a lasting solution to the conflict and let market solutions prevail Doubtful that this conflict would have a lasting resolution: Reasons… 1. US disregard for agreements 2. Can. Land-ownership structure versus US strategy of acquisition 3.A pattern of managed trade interim solutions.